Fiscal Architecture and the Analysis of Public Expenditure Needs and Revenue Capacity

Powerful economic, demographic, and institutional and technological changes are occurring throughout the world. The concentration of world population has moved from the developed to the developing economies, the distribution of income in most countries has become increasingly disparate, some developing countries are witnessing unprecedented increases in the percent of elderly--others in the young. The natural growth rate in population is 1.4 percent per year worldwide; but developing countries populations are growing much more quickly than the populations of developed countries (1.7 percent versus 0.1 percent). According to population projections, the developing countries will increase their share of world population from 81.67 percent in 2000 to 86.2 percent in 2050. These changes imply pressures for public expenditures that are different depending on the type of economic and demographic change occurring. At the same time, the capacity of traditional revenue sources is affected by similar factors.
These changes are largely beyond the control of any country, but they cannot be ignored in the development of any effective fiscal policy. Nor can the institutional factors that govern a country and the technological changes faced by all countries. These factors affect anti-poverty policy as well as more general fiscal policy. This is because, when taken together, these forces define the "fiscal architecture" of a poor country's expenditure needs and its revenue-producing potential. As such, they establish the framework for developing polices that make "fiscal sense" in defining a society's practical options for policy design and implementation. A simple example is as follows. A country in which property rights are not well establish and will not be for a number of years would be ill-advised to count on a market-based property tax to generate stable revenues in the near future. The importance of recognizing these parameters and the opportunities they provide for (and the limitations they place on) policymakers has been magnified in the past decade, as the pace of globalization of markets for products and services has accelerated sharply. Understanding how the new trends may affect the rate of growth in revenue collections and change the composition of client populations may enable policy makers to redesign expenditure programs and revenue instruments to stabilize a country's long-term finances.
Working Paper Number 01-11.

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